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Network News • 2024-01-18

Malta braces for a higher economic model

As the new year grinds on, we notice how as a result of technological advances, fewer workers than ever are needed to produce, say, a kitchen cabinet. If we take the example of how the work force is being re-skilled in India, the country needs five times fewer workers required to operate a factory in 2007 than in 1980.

In Malta, we are no exception. We need more talented workers that can be able to ride the AI revolution and improve the value chain. To achieve this in the shortest time possible, this means a root and branch reform of vocational and technical education.

Across the world, industry now runs on skill and capital, which rich countries have in abundance, and rely less on labour, meaning that a large, low-skilled workforce (in our case Identity has approved the hiring by temping agencies of over 62,000 third world county nationals).

Cheap and unskilled labour no longer offers much of a route to a speedy economic development. In Malta, leading export sectors particularly the low yield tourism, and some types of manufacturing have to be upgraded with an injection of capital and imported talent.

This year, can we crank out one thousand new engineers from existing educational faculties? Not likely. In fact, only last November, the National Statistics Offices said that the index of industrial production increased by a mere 1 per cent when compared to the corresponding month in 2022.

Another major drawback following years of recruiting TNC’s (almost one in six of the entire population) saw temping agencies reap millions when charging them to pay for recruiting and local job formalities. One suspects they were given the green light by the authorities.

On their own steam, SMEs face enormous problems in recruiting staff due to this demographic change. Action must be taken to implement measures in all areas: from early-stage education to vocational training or the improvement of hard and soft skills all along the working life.

A major challenge that caught the authorities unaware in 2022/3 was the development of what IT gurus are calling ‘generative AI’. There are now many who believe that generative AI will transform our society and our economy in the way steam power, electricity, the telephone, and internet did.

IMF recently predicts that 40 % of all modern workforce will be affected by AI. On the upside, AI has the potential to significantly enhance productivity in an economy. This will increase national income in a number of sectors. How can Malta wake up and smell the coffee to prepare for this Industrial Revolution?

On the other hand, the question that keeps coming up is whether AI will disrupt the labour market to such an extent that jobs will be lost and they will not be readily replaced, thereby causing poverty, unless workforces are urgently re-skilled. There is an army of about 12,000 teachers across different grades (practically all clamour for upskilling opportunities).

They need to roll up their sleeves and face this technological challenge. To turn a three-year recurring deficit into a surplus, 2024 must see higher exports and productivity. It is export or die.

One must reflect how domestic markets vary widely for several reasons, including the kinds of products sold, location, duration, and size. Aside from the two most common markets—physical and virtual—there are other kinds of markets where parties can gather to execute their transactions.

In a free economy, we expect the forces of production to meet both domestic and export demand at a higher level such as to strike a surplus. It stands to reason that in a capitalist economic model, this relies on free market conditions for the creation of wealth; the production of goods and services is based on supply and demand in the general market.

On the contrary, we can also compare and contrast what regulates markets in a socialist economic model, where the production of goods and services is either partially or fully regulated by the government; this is referred to as central planning, and the economic structure that is created is known as a command economy.

Malta since joining EU in 2004, has tried to stir away from a purely capitalist regime neither a thoroughbred socialist one. We experimented on the basis of a mixed economy, falling somewhere on the spectrum between pure capitalism and pure socialism. In contrast, most ex-Communist countries prior to joining EU, all embraced socialism. Their means of production are commonly owned by the community or state on behalf of its citizens. Malta voted for a mixed economy.

Since joining the EU, commerce is run partly by the government through its vast agencies, now with a bloated civil service which also recruits labour from private firms for some of its needs. Currently it is subsidizing in a non-discriminatory way, energy and cereals.

While discussing the deficits generated in the past three years, for which party apologists blame them on the pandemic, yet we cannot overlook the effects of a rampant underground economy that kept many businesses running when schools, churches, ports and airports were blocked to fight Covid. A large percentage of Maltese are exposed to the black-market economy. Partially undeclared self-employment is among the most prominent types of undeclared work.

Nearly a fourth of the Maltese (26%) are estimated to have purchased goods or services that may have included undeclared work from firms or businesses. This hidden economy points to an illegal market where transactions occur without the knowledge of the government or other regulatory agencies.

Many illegal markets exist to circumvent existing tax laws. In summary, it is often assumed that a country's gross domestic product (GDP) is not its actual one, because it does not take into account all the business activity conducted in underground markets.

So in our case, the high deficits officially recorded in the past three years do not take account of the underlying underground economy which uplifts the real GDP earned. In conclusion, the challenges from AI are real and to face them both real and underground economies need to embrace them.

 

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